FDI screening guidance: shedding some light in the darkness
Seven months after the coming into effect of the Dutch general investment screening regime, as laid down in the ‘Vifo Act’, the screening practices of the Dutch foreign investment screening desk (the BTI) may still appear a mystery to ‘outsiders’.
However, while the BTI has yet to publish its first decision, it has lived up to its promise to be available for informal discussions on the interpretation of the Vifo Act. The BTI has recorded the outcome of these discussions and its cases in recently released guidance papers. These papers clarify the BTI’s views on the applicability of the regime to i) internal restructuring, ii) acquisition of assets and iii) being ‘active in’ sensitive technology.
Additionally, a recently issued report provides information on the number of filings made under the different investment screening regimes in the Netherlands and their outcome. This report provides no insight on substance, but an upcoming report might shed further light into that darkness. For now, outsiders will need to rely on the guidance papers and first hand experience for their assessments.
In June 2023, the Vifo Act (Wet Veligheidstoets, Investeringen, fusies en overnames, Wet Vifo) entered into force. The Act provides a general investment screening regime with the aim of protecting national security in the Netherlands.
To recapitulate, the Vifo Act is applicable to certain acquisition activities in targets that are active as a vital provider, operator of a business campus or in sensitive or highly sensitive technology. Previous newsletter articles that go into more detail on the scope of the Vifo Act can be found here, here and here. As mentioned in these articles, the Minister of Economic Affairs and Climate Policy (the Minister) has the power to call in transactions that closed between 8 September 2020 and 1 June 2023. This power will cease to exist on 1 February 2024.
Because the BTI does not publish its approval decisions, and there has not yet been a prohibition decision under any of the FDI regimes (which are as a rule published), there has been little public insight into the application of the Vifo Act.
Now, seven months after the entry into force of the Act, the BTI has published guidance papers (in Dutch), clarifying the (non-)applicability of the Vifo Act in relation to three topics, namely i) internal restructuring, ii) acquisition of assets and iii) the meaning of being ‘active in’ (sensitive) technology. These will be discussed in more detail below.
I. Internal restructuring
The first guidance paper provides information on when an internal restructuring would lead to an ‘acquisition’ within the meaning of the Vifo Act.
An internal restructuring relates to a change in the group structure, and could lead to a legal entity being inserted or replaced and/or the activities within the group being organized/grouped differently.
In general, an internal restructuring does not trigger a notification under the Vifo Act as long as the target’s ultimate shareholders (direct or indirect) and their shares in the target, remain entirely the same before and after the restructuring. In its guidance paper, the BTI clarifies in which circumstance internal restructuring can trigger a Vifo notification (provided the activities of the target company are within the scope of the Vifo Act), namely:
- when the internal restructuring results in the target company (directly or indirectly) having a new minority shareholder, this qualifies as acquisition under the Vifo Act, if the newly added shareholder acquires (joint) control or ‘significant influence’ in case of highly sensitive technology; and
- when a holding company is abolished and for a short interim period – even for just a day – the shares in the subsidiary are transferred to another holding and temporarily held by a third party until the same shareholders, each holding the same amount of shares, acquire the shares in the new holding, the transfer of the shares to the third party constitutes an acquisition under the Vifo Act; and
- the transfer of a target company to another fund, each controlled by the same manager qualifies as an acquisition under the Vifo Act.
Furthermore, the BTI clarifies that moving the seat of a subsidiary to another country does not qualify as an acquisition under the Vifo Act as long as the ultimate shareholders (and their shareholdings) remain entirely the same.
II. Acquisition of assets
The second guidance paper sets out when an acquisition of one or more assets qualifies as an ‘acquisition’.
The BTI clarifies that an acquisition of assets can take place through obtaining part of an undertaking. In that regard, the BTI provides a non-exhaustive overview of assets and operating resources that can qualify as ‘assets’ under the Vifo Act, such as key employees, key contracts, machinery, intellectual property and/or knowhow.
Separate undertaking
For the Vifo Act to apply, the acquired assets must enable the acquirer to qualify as a vital provider, or as an undertaking active in the field of sensitive technology. The acquired assets must be able to function as a separate entity to be considered a ‘target company’ under the Vifo Act. If an asset is, in itself, essential to performing activities in the field of sensitive technology this may – depending on the asset’s uniqueness – in some circumstances be sufficient to independently qualify as ‘target company’.
Guidance is also provided on relevant factors when determining whether part of an undertaking is able to operate as separate entity, and may thus qualify as ‘target company’, as required for the applicability of the Vifo Act. This may for instance be the case when the (to be acquired) part of the business already reports independently, serves separate clients and/or independently supplies goods and services. Furthermore, the business must be involved in economic activity with a commercial purpose. It must therefore (be able to) generate income and/or (ultimately aim to) make profit.
Lastly, even if assets are held in a community and the acquisition takes places through bond rights (in the form of participation), the Vifo Act will still apply.
III. ‘Active in’ sensitive technology
The last guidance paper clarifies on the basis of which activities, a company can be considered as being ‘active in’ sensitive technology under the Vifo Act.
A target company is considered ‘active in the field of sensitive technology’ under the Vifo Act if in the Netherlands (i) it conducts research into or within the field of the relevant sensitive technology and/or (ii) it exploits such technology by developing, processing, manufacturing or incorporating products into semi-finished or finished products with a view to commercialisation.
For highly sensitive technology, the BTI explains that a company that provides products, machines, know-how or labour that are tailored to research into or development/production of those products, may be deemed to be independently active in the field of such technology. Parties with such products, knowledge and/or services can be that intensively involved in the production process, so that they in principle fall within the scope of the Vifo Act.
If an entity is an end-user, holding company or only active in sales of sensitive or highly sensitive technology, they will generally not be considered ‘active in’ it due to their lack of expertise or intellectual property rights.
Academic institutions
As stated, commercial exploitation is necessary for a target to be considered ‘active in’ sensitive technology. In light thereof, specific guidance is given for academic hospitals and other academic institutions. Because these institutions do not aim at commercially exploiting their products/research, they are generally not considered ‘active in sensitive technology’. This is, however, different if the knowledge, intellectual property rights, trade secrets, laboratories or experimental production facilities are held by subsidiaries that do aim at commercial exploitation.
IV. Ministry of Economic Affairs and Climate Policy Report
In addition to the guidance papers of the BTI, the Minister published a report providing figures on all investment screening regimes in the Netherlands, i.e. the Electricity Act, the Gas Act, the Telecommunications Act and the Vifo Act respectively. While the report was primarily drawn up to fulfil the Minister’s reporting obligation under the Telecommunication regime, the Minister took the opportunity to provide an update on all filings and the status of BTI’s investigations between October 2022 and September 2023:
- 37 filings in total were made to the BTI;
- Five filings were made under the Electricity Act;
- One filing was made under the Gas Act;
- Five filings were made under the Telecommunications Act; and
- 26 filings were made under the Vifo Act (of which 15 investigations were finalized);
- No investments were blocked, but one case was approved subject to conditions.
A more detailed yearly report is expected to be published by the BTI in the first quarter of 2024, which might shed more light on the BTI’s practices to date.
Conclusion
While the BTI’s enforcement strategies may appear a black box for outsiders, the BTI has clarified its view on the application of the Vifo Act through informal guidance and takes this up a notch with the recent publication of three guidance papers.
These papers provide helpful insights on when internal restructurings or asset deals fall within the scope of the Vifo Act and when a company is considered ‘active in’ sensitive technology within the meaning of the Vifo Act. This increases legal certainty for companies wondering whether a transaction is notifiable under the Vifo Act.
A report due in the first quarter of 2024 may open the box even further.
This article was published in the Competition Newsletter of January 2024. Other articles in this newsletter:
